The Economy Molded: Macro and Micro Economics - Assignment Example

Macro & Micro economics The economy is mostly molded by producers and consumers. The government also has powerful effects in some areas. The United States government has adopted policies to try and influence the economy’s growth rate. The government adopted the monetary policy and the fiscal policy to aid in its quest to establish a stable economic growth. Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity to produce goods and services. Changes in spending or taxing can alter both the magnitude and the pattern of movement for goods and services (Ellis p 57). With time, this aggregate demand affects the allocation of resources and the productive capacity of an economy through its influence on the returns to factors of production, the development of human capital, the allocation of capital spending, and investment in technological innovations. Tax rates, through their effects on the net returns to labor, saving, and investment, also influences both the magnitude and the allocation of productive capacity. Macroeconomics has long featured two general views of the economy and the ability of fiscal policy to stabilize or even affect economic activity. The equilibrium view sees the economy quickly returning to full capacity whenever disturbances displace it from full employment. Accordingly, changes in fiscal policy, or even in monetary policy for that matter, have little potential for stabilizing the economy. Instead, inevitable delays in recognizing economic disturbances, in enacting a fiscal response, and in the economy’s reacting to the change in policy can aggravate, rather than diminish, business-cycle fluctuations. An alternative view sees critical market failures causing the economy to adjust with more difficulty to these disturbances (Ellis p 163). If, for example, consumers were to reduce their current spending in order to consume more in the future, producers, who would not know the consumers’ future plans for want of the appropriate futures markets for goods and services, would see only an indefinite drop in demand, and this might encourage them, in turn, to reduce their hiring and capital spending. In this world, changes in fiscal and monetary policy have greater potential for stabilizing aggregate demand and economic activity. How the economy reacts to fiscal policy depends on whether it is at full employment or operating below its full capacity. Wages and prices will start going up at great rates if monetary policy creates demand enough to enhance capital and labor markets beyond its long-run goals. A monetary policy that constantly attempts to its halve its short-term rates at an all time low will at the end achieve higher inflation will have no fixed increases in the growth of output or reduction in unemployment. In the long run, monetary policy cannot set employment and output. As there is a trade-off seen between lower unemployment and higher inflation in the short run, this trade-off will not be in the long run. This policy will also affect inflation directly through the people’s expected future inflation. If for example the fed eases the monetary policy and consumers and businesspeople figure it out, that will lead to higher inflation in the future and they will ask for an increment in their wages and prices. That will heighten inflation without great changes in output and employment. National saving provides the resources for a nation to invest domestically and abroad. Domestic investment in new factories and equipment can boost productivity of the nation’s workforce. Increased worker productivity, in turn, leads to higher real wages and greater economic growth over the long term. U.S. investment abroad does not add to the domestic capital stock used by U.S. workers to produce goods and services. U.S. investment abroad does increase the nation’s wealth and will generate income adding to U.S. GNP. When national saving is lower than domestic investment, a nation can borrow from foreign savers to make up the difference. The resulting increase in domestic capital would enhance worker’s productivity and wages, but the payments to foreign lenders flow abroad. In general, saving today increases a nation’s capacity to produce more goods and services and generate higher income in the future. Increased economic capacity and rising incomes will be crucial as the population ages because a relatively smaller workforce will bear the burden of financing Social Security and Medicare while also seeking to maintain its own standard of living (Ellis p 247). Saving entails a tradeoff because it requires consuming less now in exchange for consuming more lately. Thus, current saving and investment decisions have profound implications for the level of wellbeing in the future, and current generations are in sense stewards of the economy on behalf of future generations. The market for loan able funds is a hypothetical market which brings borrowers and savers also bringing together available money in commercial banks and other financial institutions and also lending institutions available for household, firms and governments to finance expenditure, which can either be investments or consumption. The demand in loan able funds is created by investments made by firms and governments in the country and abroad. When domestic savings are more than investments, loan able funds will be in excess, and the surplus can be lent abroad, thus increasing the national capital outflow (Ellis p 305). A family in America may find that at the end of the year, it has income that was never spent and rather than of putting it in a safe where no interest is earned, the family buys government bonds or puts it in a bank to earn interest. In both cases, the household has increased the domestic savings available for savings at home. The Bureau of Labor Statistics defines the labor force as all civilians classified as employed and unemployed. The employed are those who work for pay for themselves or someone else or who work 15 hours or more as unpaid workers in a family-operated business. Also included among the employed are those who were temporarily absent from work for reasons such as illness and child-care problems. The unemployed include individuals who had no job but were available for work and looking for employment. 4. Based on the current statistics by the bureau of labor statistics (BLS) what is the labor force number of 2012? According to the Bureau of Labor Statistics, labor force for 2012, were 155,511 where there were 143,305 persons and 12,206 unemployed. 5. Based upon the statistics by the BLS what is the labor participation rate of 2013? The labor participation rate as of October 2013 is 62.8 %.( Bureau of Labor Statistics, 2013) 6. The following market (economic) data has been collected for a closed economy in an Asian region. The data was for twelve month period. Y (GDP) = 10,000 C (Disposable income) = 6,000 T (Taxes) =1,500 G (Government expenses) =1,700 It is also estimated that the investment function is I=3,000-100r Where r is the country’s rate interest rate, expressed as a percentage, Calculate the private, public savings, public savings, national savings, investment and equilibrium real interest rate Private savings= GDP- Tax- Disposable income Private savings is = 10,000 - 1,500 - 6,000 = 2,500 = 2,500 Investment GDP- C-G 10,000-6000-1700 I= 2,300 Public savings = Taxes - Government expenditure = 1,500-1700 =200 National savings (S) = private savings+ Public savings. 2500+200 = 2,700 Equilibrium real interest rate Ae= C+I+G+M =6000+2700+1500+200 10,400 Works cited Ellis Jenkins. Bulletin of the United States Bureau of LaborStatistics: London [u.a.: SAGE, 2005. Print. Read More